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Regulation and Compliance > State Regulation > Massachusetts

Schwab Charged for Failure to Stop Lapsed Advisor From Collecting Fees

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What You Need to Know

  • Patrick O’Connell collected fees from Schwab customers’ accounts for years after his registration had lapsed, according to the Massachusetts Securities Division.
  • Schwab took no steps to monitor customer accounts for further payments to O’Connell, the complaint states.
  • Galvin says he brought the action to protect investors from the dishonest practices of Schwab and O’Connell.

Charles Schwab was charged Wednesday by Massachusetts securities regulator William Galvin for unethical and deceptive practices that allowed a third-party investment advisor to continue to collect advisory fees from Schwab customers’ accounts for years after his registration had lapsed.

According to an administrative complaint filed by the Massachusetts Securities Division, James Patrick O’Connell of Gloucester, a former investment advisor representative, has collected at least $125,000 in investment advisory fees since his registration last lapsed in 2014.

O’Connell’s alleged illegal activities were discovered while investigating a complaint against O’Connell for exploitation of senior citizens.

Schwab removed O’Connell from its platform in 2012 for allowing his registration to lapse for nearly two years, which also resulted in a reprimand from the Securities Division.

“Despite this removal, Schwab took no steps to monitor customer accounts for further payments to O’Connell, who collected at least $46,000 in investment fees from Schwab brokerage accounts over a period of more than six years while remaining unregistered,” the complaint states.

O’Connell continued to make recommendations to clients and collect fees from their accounts, including recommendations that were unsuitable.

According to the complaint, O’Connell issued blanket recommendations without respect to individual client needs and over-concentrated portfolios in global communication infrastructure companies.

“Such over-concentration of a portfolio in one specific market sector poses a substantial risk to any investor, but the risk of such over-concentration is especially acute here, given that most of O’Connell’s clients are seniors,” the complaint states.

“The Division brings this action to protect investors from the dishonest practices of Schwab and O’Connell, to provide relief for the harm done to those investors by O’Connell, and to address a compliance failure on the part of Schwab,” the complaint continues.

Schwab said in a statement: “We are dedicated to giving our clients the highest level of confidence when doing business with us and take our obligations to them extremely seriously. We are committed to earning our clients’ trust and work diligently to fulfill our compliance responsibilities.”

Galvin’s office is seeking an order requiring Schwab to reimburse investors for all fees paid to O’Connell while he was unregistered.

Galvin also wants O’Connell and Schwab to be fined and that Schwab be required to undergo an independent compliance review to establish policies and procedures to prevent similar illegal activities in the future.

(Photo: Bloomberg)